Lebanon entered a new chapter of political uncertainty today as prime minister-designate Saad Hariri stepped down after the Hezbollah-led opposition rejected his proposed cabinet.

Hariri had been trying since June to form a government but his efforts were foiled by disputes over the distribution of top ministries. This week, he named his own cabinet list, which was swiftly rejected by the opposition.

His resignation will prolong Lebanon's political crisis which in May 2008 saw Hezbollah fighters stage an armed takeover of parts of Beirut, tipping the country to the brink of civil war. With Hariri backed by regional powerhouse Saudi Arabia and Hezbollah allied to Saudi's great rival, Iran, Lebanon's political conflict is often considered a bellwether for the region's balance of power.

"I hope that this decision will be in the interests of Lebanon and will permit a relaunch of dialogue," Hariri said, just three months after his western-backed coalition convincingly won re-election over the Syrian and Iranian-backed opposition.

Leaders on each side accused their opponents of breaking the terms of Lebanon's consensus democracy.

"This real opportunity to form a cabinet was lost in preconditions," said Hariri, who is widely expected to be reappointed prime minister once cabinet negotiations resume. "We had rounds and rounds of consultations and it always ended with no result."

In turn, Hezbollah leader Hassan Nasrallah said Hariri's coaltion had "not made a single concession at all".

Nasrallah rejected accusations by Hariri supporters that Hezbollah was delaying the government's formation while it waited for the dust to settle on the domestic political turmoil in Iran.

Iran is also facing more severe international sanctions if it fails to meet Barack Obama's offer to engage in serious negotiations over its nuclear programme before the end of the month.

Yet so far the formation of the cabinet has centred on a highly contentious domestic affair: control of Lebanon's telecoms ministry.

Hezbollah's top ally, Christian opposition leader Michel Aoun, has insisted his son-in-law, Gibran Bassil, retain the ministry, prompting accusations of favouritism, particularly as top of the new government's agenda will be the highly lucrative privatisation of the two state-owned mobile firms, expected to garner as much as $7bn (£4.2bn).

The ministry also plays a key security role: phone records are currently at the heart of an international investigation into the 2005 assassination of Hariri's father Rafik, a five-time former prime minister, and in an unprecedented string of arrests of Lebanese citizens accused of spying for Israel.

"Both sides need the telecoms ministry," said Ousama Safa, director of the Lebanese Centre for Policy Studies. "It's become very sensitive. For Aoun, it's a matter of principal, but Hariri needs it to ensure cooperation with the investigation into his father's killing."